No One Knows How Much Money India's Cities Are Spending

LUCKNOW, India – One of this city’s prized attractions, just across its central river, is the Dr. Bhimrao Ambedkar Park. It is stunning—a hundred-plus acres of pink sandstone, manicured greens and glimmering marble. The tribute to the famed Dalit, the caste once known as the “untouchables,” is also expensive. Kumari Mayawati, the contentious former chief minister of Uttar Pradesh, India’s most populous state, spent hundreds of millions on this park and another farther north. At one entrance is a looming bronze statue of Mayawati, holding her customary designer handbag.

Lucknow, home to nearly 3 million, is also in the initial stages of building its first subway system, like dozens of other rapidly growing Indian cities. Its financing is reportedly settled. Yet even if the project remains untarnished, residents will find it difficult to figure out exactly how much the city spends on it. That’s because Lucknow—like nearly all major Indian cities—doesn’t regularly release its financial numbers. Those who want to track how a city uses its money, on everything from a new metro to filling a pothole, cannot.

This dearth of data impedes democracy. And it’s the main reason that Indian cities don’t just borrow the money they need.

A decade ago, the NGO Janaagraha was founded, in Bangalore, to bridge this divide between urban governance and citizens. They soon launched Public Records in Operations and Finance (PROOF), a campaign aimed directly at filling this data gap. Before municipal finance can expand here, cities must figure out a standard way to track and report how much they spend, explains Srikanth Viswanathan, the coordinator of PROOF.

Indian cities need tons of cash. A recent report from IBM claims the nation will have to spend $1.2 trillion over the next two decades to create "smart cities." (Although, for the time being, functioning cities will likely suffice.) Most of the money India's cities spend on infrastructure projects arrives now through federal and state grants, but they aren’t keeping up.

"Grants are going to be in short supply,” Viswanathan says. "It will not be enough for cities to fund their own infrastructure needs."

One solution is for places like Lucknow to turn to bond markets, as urban centers in the U.S., Europe and increasingly Asia have. In 1997, Bangalore issued the nation’s first municipal bonds. They took off slightly, but only in a few cities. And they peaked around 2005, according to research by Shahana Sheikh and Mukul G. Asher. Two years later, urban local bodies (ULBs), the term India uses for its municipalities, were spending around $180 billion. Of that, only three percent was borrowed.

That number is likely to stay low because full financial disclosure, the first building block for debt finance, does not exist even though it's required under national law.

Mumbai, India's financial capital, fares slightly better than most. Along with a couple other ULBs in the western state of Guajarat, it releases financial information fairly regularly. But the Mumbai balance sheet is a dense document, impenetrable to those who aren't trained accountants. It provides no granular detail on specific spending projects in the city---where they go, who is contracted for them, or when they begin and end.

This dearth of data impedes democracy. And it’s the main reason that Indian cities don’t just borrow the money they need.

And Mumbai, like all other Indian metropolises, has yet to put details of its roughly $5 billion budget online. Viswanathan cannot recall the last time Bangalore, a sizable economic engine, fully opened its books. “None of the cities may meet the basic threshold,” he continues. "None of them produce timely, credible financial statements in a standardized format."

And without those, interested financiers, a small but growing sector, won’t buy the bonds that India's cities issue. "Investors are not sure that their money will remain secured with municipal corporations," explains Anand Wadadekar, an economist at the Samvit School of Infrastructure Business.

Better disclosure is not the only problem India's cities will have to solve if they want to become players on the bond market. Local governments don’t currently have bankruptcy protection laws, a hedge for buyer and issuer heading into municipal bonds. And credit ratings need to improve—by the count of Sheikh and Asher, only 40 percent of the 63 largest ULBs were dubbed investment grade—as well as public accountability and the independence of cities from the often domineering states.

Without accurate information, however, the first one will not occur, and the these shifts will be meaningless.

Still, some are confident that city figures can be gathered and deployed. The country is able to enforce fairly stringent rules for the financial disclosures of private companies, who benefit from a fairly robust corporate bond market. Viswanathan sees no reason why the same standards cannot be applied to public entities.

A man performs a stunt on his motorcycle outside the Ambedkar memorial park in Lucknow. (Adnan AbidiReuters)

Two weeks ago, the central government unveiled major economic overhauls. Whether those reforms will last, or reach places like Lucknow, is yet to be seen. But new investment will certainly add to the steeper funds now accompanying the Metro-sized projects popping up everywhere.

"You’ll see a lot more money coming into cities for infrastructure, for better services," Viswanathan says. "Which is another reason why we think financial disclosure is important. It’s like pushing more and more water into a leaky pipeline." If cities could borrow more, the funding would approach a flood. Until then, he’s concerned that what they cannot see will trickle straight out.